"The Iranian government must understand that the world is watching. We mourn each and every innocent life that is lost. We call on the Iranian government to stop all violent and unjust actions against its own people. The universal rights to assembly and free speech must be respected, and the United States stands with all who seek to exercise those rights.

As I said in Cairo, suppressing ideas never succeeds in making them go away. The Iranian people will ultimately judge the actions of their own government. If the Iranian government seeks the respect of the international community, it must respect the dignity of its own people and govern through consent, not coercion.

Martin Luther King once said - “The arc of the moral universe is long, but it bends toward justice.” I believe that. The international community believes that. And right now, we are bearing witness to the Iranian peoples’ belief in that truth, and we will continue to bear witness."

Lots of queries lately as to why 10 years (and other bonds on the curve) are still at markedly negative repo rates: i.e. the phenomenon of negative interest for lenders. This is an interesting topic which I will touch on again soon, especially with recently implemented 300 bps fees for delivery fails. Across The Curve has discussed this issue recently and I point to his post for a good primer. An even better primer is straight out of the New York Fed "Repurchase Agreements with Negative Interest Rates." Recommended Sunday reading for anyone curious about the intricacies of the Treasury market.

Friday, June 19, 2009

For the 4 people who are still keeping track of the complete failure that is our banking industry, today the FDIC closed down three more banks. This is what - 40, 50, 60? banks that have failed year to date. I used to keep track few months ago. Now, not so much.

Southern Community Bank, Fayetteville, Georgia was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with United Community Bank, Blairsville, Georgia, to assume all of the deposits of Southern Community Bank.

As of May 29, 2009, Southern Community Bank had total assets of $377 million and total deposits of approximately $307 million. United Community Bank paid a premium of 1 percent to acquire all of the deposits of the failed bank. In addition to assuming all of the deposits of the failed bank, United Community Bank agreed to purchase approximately $364 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $114 million. United Community Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's DIF compared to alternatives

Cooperative Bank, Wilmington, North Carolina was closed today by the North Carolina Office of Commissioner of Banks, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with First Bank, Troy, North Carolina, to assume all of the deposits of Cooperative Bank, except those from brokers.

As of May 31, 2009, Cooperative Bank had total assets of $970 million and total deposits of approximately $774 million. In addition to assuming all of the deposits of the failed bank, First Bank agreed to purchase approximately $942 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $217 million.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $114 million.

First National Bank of Anthony, Anthony, Kansas was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Kansas, South Hutchinson, Kansas, to assume all of the deposits of First National Bank of Anthony.

As of March 31, 2009, First National Bank of Anthony had total assets of $156.9 million and total deposits of approximately $142.5 million.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $32.2 million.

Today the Unofficial Committee of Family and Dissident GM bondholders filed an objection to the 363 sale (link here). And any objection that starts with a quote from our current President's inaugural address promises to make for an interesting read: this one does not disappoint. The committee brings up a plethora of valid points, most of which go to the heart of the matter namely the speed of attempted 363 sale process. However, unlike in the case of Chrysler where the administration could threaten the deal with falling apart if Fiat were to walk away, a comparable anti-stall tactic would be disingenuous in this case. So while the objection will, of course, be duly overruled by Judge Drain, what will be interesting is what route the auto task force will use to get whatever it wants in this situation.

Because, like clockwork, the entire market always turns on buy programs at the same time. Who cares about paying a good price when you are playing with other people's money in a SPARC-manipulated playground. Mr. T pities the retail fools who thought they have some chance of making money in this WWF-esque rigged spectacle.

Also, good thing that the VIX is down 10% in a flat market. Thank god the markets are "regulated."

The latest development in the Porsche-Volkswagen saga comes courtesy of German Manager-Magazin, which notes that Daimler is apparently in advanced negotiations to acquire a stake in the troubled luxury carmaker. It was still unclear what happened with the massive VOW options held by Porsche ahead of expiration today: as the company did not have the money to exercise them earlier, one can only hope that Porsche scrambled enough cash to at least roll the options.

It is only fitting to use Google's bizarro Yoda translator to provide the latest piece of information in this most ridiculous of corporate soap operas.

Negotiations on joining Porsche

The carmaker Daimler negotiates informed manager magazin with Porsche on a career in the sports car manufacturer posted. The talks are at an advanced stage. Daimler would thus indirectly also to participate in Volkswagen.

Hamburg - The automotive group Daimler is considering a stake in the competitor Porsche. The talks would be at an advanced stage, such as manager-magazin.de has experienced. Daimler CEO Dieter Zetsche and Porsche Chief Executive Wendelin Wiedeking had the potential options of a career already discussed at the end of May, it was in financial circles. The discussion is therefore that Daimler has a capital increase shares of Porsche SE will.

Daimler would thus indirectly also to Europe's biggest carmaker Volkswagen join. Porsche holds 50.8 percent of the voting rights in VW. The group had with the acquisition, however verhoben and is looking urgently for investors. Parallel negotiations Porsche boss Wiedeking also with the Emirate of Qatar on various possibilities of a career.

It is also possible that a package Daimler Porsche VW options decline, experienced manager-magazin.de from financial circles. About the options Porsche has secured the opportunity to make further approximately 25 percent of Volkswagen's shares at a fixed price to buy. Porsche but lacks the money, the options and make up the shares to pay.

In the past week were leading members of the families Porsche and Piëch taken in Salzburg. The clan includes 100 percent of Porsche shares. Wiedeking asked the families to agree, a portion of the shares to outside investors must. He is not appealed to a particular investor notes. The participants initially refused their consent. The families will be available early next week to a further meeting to come together.

Coming soon to a Park Avenue showroom near you - Porsche C63 AMG GT3. Also, might be a good time to check out those DAIGR CDS.
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In what is sure to blow Barney Frank's lid wide open, Moody's (never one too far behind competitor S&P, except when it comes to TALF ratings) announced earlier it was preparing a major, multi-notch rating downgrade of the state if it does not produce a budget any time soon. As the latter is a pipe dream, California better prepare for its CDS to hit its recent all time wides.

[California's] A2 rating is just five notches above speculative status and Moody's raised the potential for the rating to tumble toward "junk" status if lawmakers fail to quickly produce a budget for Governor Arnold Schwarzenegger to sign.

"If the legislature does not take action quickly, the state's cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July," Moody's said in a statement.

"Lack of action could result in a multi-notch downgrade," Moody's added.

A downgrade could push California's borrowing costs up at time when state officials expect to issue up to $9 billion in revenue anticipation notes as soon as possible after a budget agreement is notched -- a deal whose timing is in doubt.

Moody's said California's leasing debt and other state-related debt are also on review, affecting a total of $72 billion of debt.

Moody's cited California's expected massive budget gap for fiscal 2010 of more than 20 percent of its general fund budget; warnings by the state controller that without budget solutions the state will not be able to meet all its financial obligations in July; continued political stalemate, and the limited options.

All in all, a complete disaster, and as Obama made clear recently, the Governator can not rely on bailout funding. Do you see what happens Arnie, when you don't have one million UAW pensioners living in your state, ordering Viagra, and never issuing recall notices on gas guzzling (stainless?) steel tinderboxes.

A downgrade of Cali would set off a chain of events, that will not only trash the ratings of virtually all other states, resulting in a skyrocketing of the MCDX, and major pain for associated index arbs, but also impair insurance companies directly and indirectly, with a final outcome likely being comparable to the Lehman blow up, however more protracted and, ultimately, more pronounced. And instead of confronting the problem head on and possibly finding way to resolve the state funding crisis before it is too late, the administration, day in and day out, keeps its head in the sand, pretending that things are getting better when in fact the economy is collapsing. In three months, when California "pays" all its vendors with IOUs and state refunds are indefinitely delayed into the next decade, any mention of 'green shoots' with just come from Dick Bove, who will likely issue a Strong Buy rating on Sacramento despite "horrific" mass hysteria and bands of roving Mad Max copycats coasting along I-5 at 120 mph in nitrous-retrofitted China-made Hummers.
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The U.S. military is planning to intercept a flagged North Korean ship suspected of proliferating weapons material in violation of a U.N. Security Council resolution passed last Friday, FOX News has learned.

The USS John McCain, a navy destroyer, will intercept the ship Kang Nam as soon as it leaves the vicinity off the coast of China, according to a senior U.S. defense official. The order to inderdict has not been given yet, but the ship is getting into position.

The ship left a port in North Korea Wednesday and appears to be heading toward Singapore, according to a senior U.S. military source. The vessel, which the military has been tracking since its departure, could be carrying weaponry, missile parts or nuclear materials, a violation of U.N. Resolution 1874, which put sanctions in place against Pyongyang.

***

The Chinese sub was shadowing the destroyer when it hit the underwater sonar array that the USS McCain was towing behind it.

That same navy destroyer that was being shadowed by the Chinese is now positioning itself for a possible interdiction of the North Korean vessel.

The pounding the dollar has taken as a result is indicative of the investing community's skepticism of CNBC's ability to spin all out nuclear war as a green shoot.
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Well, the "for broke" part is hopefully a pun. But based on their most recent holdings, which among others include 104% of the IYR Real Estate ETF, Credit Suisse is certainly ploying something here (one hopes, or else that is one big fat finger). When you have the balance sheet of the Swiss National Bank to back you up, you don't really care much if you overload the boat. Of course, this is excatly what Boaz Weinstein was thinking when the world blew up in his face.

The state unemployment data from the BLS is likely significantly flawed but it makes sense to visualize it nonetheless. The chart below demonstrates both the monthly change in unemployment (April - May 2009) as well as the year-over-year increase in state unemployment (vs. May 2008). Notably, Michigan was in a world of pain even before the bankruprtcy of GM and Chrysler. The green shoot: seems cattle ranchers are in high demand in N/S Dakota and Wyoming.

Everyone else does, why should David be an exception. Fast fwd to 2:20 - "You want a good laugh, take a look at Dick Bove's latest report." Dick - when CNBC makes fun of you for smoking the "shutes" you know you have reached a new low on the propaganda pole. At least that DC advisory job beckons - better make use of it quick. The next election is in just over 3 years.

Latest NYSE Program Trading data out. Program Trading volume continues to decline, with 3.4 billion shares traded, down 700 million from the week before. Most notable is Goldman's dramatic drop in principal trading, down from on average 1 billion over the past 2 months to a mere 631 million. In the meantime, Credit Suisse is continuing its climb in Principal PT. As Zero Hedge will discuss over the next few days, CS may have positioned itself as one of the biggest principal holders of the single name - ETF basis trade, with, by some estimates, over $20 billion in net exposure. If true, that would make Boaz Weinstein's blow up in the CDS basis trade seems like child's play when the ETF trade reverts and CS is forced to run to the SNB for yet another bailout.

In yet another splinter approach from the route espoused by Bernanke, the Dallas Fed shares its thoughts on limiting irresponsible lending. The Fed's solution is the imposition of loan-to-value caps which would make a lot of sense, but would substantially curb loan demand - a course of action that the Federal Reserve would fight tooth and nail against in its attempt to deflate debt by a new wave of excess (and even more irresponsible as it would be taxpayer backstopped) lending. The Dallas Fed's justification:

A maximum loan-to-value ratio would create a cushion of borrower equity—the excess of collateral value above loan amount—available to lenders in the event of default. In addition, borrowers would face the prospect of losing their equity, making them more likely to apply only for loans they were reasonably sure to repay. By promoting such conservatism, loan-to-value regulation would guard against the speculative borrowing that leads to credit booms.

While this proposal has about a snowball's chance in hell of ever being effectuated under Bernanke, and about a million times less under successor Summers, the take home message is the ever increasing "vigilantism" by regional Feds in their attempts to bring rationality to the system hell bent on repeating the excesses of the past credit bubble. At what point will the Bernanke vs Everyone dynamic become unsustainable? Will another major market crash be sufficient to shift the balance of power away from Bernanke to the likes of Yellen, Lockhart et al?

Thursday, June 18, 2009

Bedtime reading for the wonkish insomniac-cum-strange attractor seeker in all of us. Additionally, London readers are lucky - Dr. Paul Wilmott, one of the best known and most respected financial quants, will host on July 8 a free quant and event driven trading forum called 'Evolving Strategies in the New World Order', covering topics such as:

Total Federal Reserve balance sheet assets for the week of June 17 of $2,053 billion consisting of:

Securities held outright: $1,176 billion (an increase of $42.8 billion, resulting from $10.9 billion in new Treasury purchases while Fed Agency debt had it single biggest weekly move in over a month, increasing by $30 billion: not surprising seeing how mortgage have been pummeled lately)

Our good friends at the CMSA (where alas Chris Hoeffel has recently passed on the baton of preexisting conflict to Patrick Sargent), have issued a lengthy missive in which they implore the administration to make sure it changes the rules so that not only do investors eat 90% of all CRE losses, but if possible to make it so Joe Sixpack actually pays for a little over 100% of the bill. Otherwise, the Commercial Mortgage Securities Association may actually have to mark its book to market and, we all know, that can't happen without a singularity erupting in the immediate subsequent moment.

To CMSA’s Members and Friends:

Commercial Mortgage Securities Association is actively engaged in discussions surrounding yesterday’s Obama Administration regulatory reform proposal, reviewing every facet of the plan and forming its initial reactions. Having said this, CMSA believes it important to be judicious but also forthright in some of its immediate concerns.

The regulatory changes proposed by the Administration include, most significantly, risk retention requirements; measures to align compensation with long-term performance of securitized assets; accounting rule changes to eliminate the immediate recognition of “gain on sale” requirements relative to consolidation on originators’ balance sheets; changes in regulation of credit rating agencies, including ratings differentiation; and disclosure and reporting requirements, including document standardization requirements. It should be noted that many of the Administration’s references cite the residential market, so, as the legislative process takes its course, it is important for CMSA to regularly differentiate and communicate the cited references from its own market.

While CMSA is encouraged by the Obama Administration’s steps to address the ongoing capital markets and liquidity crisis that continues to affect our greater economy, we must begin by strongly re-stating our long-standing opposition to any plan that includes credit rating differentiation for structured products.

The association always has advocated some checks-and-balances for rating agencies to avoid conflicts of interest, and has strongly supported the need for additional transparency in ratings and the methodologies used by the rating agencies, but we strongly oppose differentiation of ratings described in the White House provisions which, we feel, causes both confusion and implementation issues. Indeed, the issue of ratings differentiation reopens a previously settled debate, a debate that will greatly delay and exacerbate market recovery. Investors have been very clear that imposing differentiation across structured finance does not enhance the understanding of certain ratings – it only creates more confusion and more uncertainty.[in other words, can Steve Rattner please make sure S&P doesnt downgrade any CMBS class... ever...]

The Administration yesterday proffered a plan that would require loan originators (or sponsors) to retain five percent of the credit risk of the securitized exposures, noting that proposed regulations would prohibit the originator of the loan from otherwise hedging or transferring the risk it is required to retain. While we agree conceptually with the issue of “skin in the game,” CMSA believes that – with CMBS – the structure already includes a third party credit-check with the B-piece (first loss) buyers who have skin in the game; B-piece buyers conduct extensive credit analysis of each loan before buying the highest risk piece in a CMBS securitization and most always are buy-and-holders, the long-term investor who underwrites the risk and holds it. [Just as we suspected, A piece buyers do not and have never done any analysis...Thanks for confirming.]

Also, it should be noted that, when viewing construction lending where financial institutions had 100% of their “skin in the game,” many of these loans failed. This, we feel, puts in question the relationship of the current credit crisis to this five percent risk retention requirement.

We do recognize that the long-term return-based concept of the holding of risk may be valid, but, for CMBS, this concept does in fact apply to the holders of the non-investment grade bonds. We support the need for sufficient disclosure and sufficient representations and warranties to properly transfer the risk, but a true sale should be permitted where risk is properly being transferred to a third party, such as these B-piece bond holders.

We need to let originators have gain on sale treatment to let the market work, and have the long-term-return-based concept apply to the holders of the non-investment grade bonds. While aligning compensation with long-term performance of securitized assets would appear to be appropriate, it’s very difficult for regulators and accountants to determine if a loan default is due to poor underwriting, due to changes in market condition, or due to poor business practices by borrower and tenants.

The Administration’s provisions for issuers of asset-backed securities are to include new reporting requirements which would include loan-level data. CMSA notes that the CMSA Investor Reporting Package (CMSA IRP®), in effect since 1994 for the CMBS industry, and currently being used by the industry in its Fifth Version, continues to be reviewed and updated on an ongoing basis. Monthly, the CMSA IRP provides not only bond level information such as updated bond balances, amount of interest and principal received on the bonds and bond ratings, but also loan level as well as property-level information.

The residential securitized marketplace is currently developing a residential reporting package modeled on CMSA’s successful IRP. The success of the CMSA IRP in the U.S. has also led to the adoption of similar standards for CMBS in Europe and in Japan.

In sum, CMSA believes it must continue to distinguish the commercial market from residential, and to continue to educate policymakers on the safeguards that the commercial market already has in place – safeguards that should obviate the need for some of the high level of regulation the Administration proposed June 17.

CMSA remains actively committed to communicating all its views to policymakers, to lawmakers and the press and will keep its members apprised on a regular basis as we move forward toward market recovery.

Spreads were broadly wider in the US as all the indices deteriorated. Indices typically underperformed single-names (as we note some pre-roll activity is holding single-names in while macro players drive indices wider) with skews widening in general as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed (with rumors of another HY list today trying to take advantage of the large skew).

Only 9.6% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 0.82% to 1.31%. IG's vol is around 4.38% per 1 day period, which leaves 98 names higher vol and 27 lower vol than the index.

The names having the largest impact on IG are International Lease Finance Corp. (-38.72bps) pushing IG 0.26bps tighter, and CIT Group Inc (+91.55bps) adding 0.49bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 1.16bps tighter, and CIT Group Inc contributing 2.19bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Cisco Systems Inc. (-10bps) pushing the index 0.11bps tighter, and MDC Holdings Inc (+8bps) adding 0.08bps to ExHVOL.

The price of investment grade credit fell 0.1% to around 98.23% of par, while the price of high yield credits fell 1.63% to around 81.25% of par. ABX market prices are higher (improving) by 0.12% of par or in absolute terms, 0.03%. Broadly speaking, CMBX market prices are higher (improving) by 0.6% of par or in absolute terms, 0.19%. Volatility (VIX) is down -1.51pts to 30.03%, with 10Y TSY selling off (yield rising) 13bps to 3.82% and the 2s10s curve steepened by 3.9bps, as the cost of protection on US Treasuries fell 0.75bps to 44.5bps. 2Y swap spreads widened 5.7bps to 49.19bps, as the TED Spread tightened by 1.1bps to 0.44% and Libor-OIS improved 0.7bps to 37.5bps.

The Dollar strengthened with DXY rising 0.6% to 80.653, Oil rising $0.19 to $71.22 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.92% today (a 0.87% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $6.09 to $932.78 as the S&P rallies (917.7 0.88%) outperforming IG credits (142.25bps -0.1%) while IG, which opened wider at 144.5bps, outperforms HY credits. IG11 and XOver11 are +1.42bps and -2.5bps respectively while ITRX11 is -0.25bps to 122.25bps.

The majority of credit curves steepened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations).

Dispersion rose +3.9bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

Only 38% of IG credits are shifting by more than 3bps and 54% of the CDX universe are also shifting significantly (less than the 5 day average of 57%). The number of names wider than the index decreased by 1 to 45 as the day's range fell to 8.5bps (one-week average 8.92bps), between low bid at 139 and high offer at 147.5 and higher beta credits (1.36%) underperformed lower beta credits (0.71%).

Cross Market, we are seeing the HY-XOver spread decompressing to 332.49bps from 270.29bps, but remains above the short-term average of 261.47bps, with the HY/XOver ratio rising to 1.45x, above its 5-day mean of 1.36x. The IG-Main spread decompressed to 20bps from 17.25bps, and remains above the short-term average of 17.88bps, with the IG/Main ratio rising to 1.16x, above its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 1.5bps to 120.4bps, with 20 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 0.74bps to 170.03bps, with Brokers (worst) wider by 3.44bps to 198.01bps, Finance names (best) tighter by 10.23bps to 701.32bps, and Banks wider by 1.46bps to 225.65bps. Monolines are trading wider on average by 35.78bps (1.52%) to 2583.34bps.

In IG, FINLs outperformed non-FINLs (0.92% wider to 1.3% wider respectively), with the former (IG FINLs) wider by 3bps to 325.1bps, with 7 of the 21 names tighter. The IG CDS market (as per CDX) is 38.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (103.35bps), with the bond ETFs outperforming the IG CDS market by around 4.67bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.13bps to 123bps (with ITRX FINLs -trending wider- better by 0.75 to 119.25bps) and is currently trading at the wides of the week's range at 99.16%, between 123.13 to 107.6bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 99.98%, between 82.7 to 71.04bps. ExHVOL underperformed LoVOL as the differential decompressed to 2.47bps from 1.86bps, but remains below the short-term average of 3.33bps. The Main exFINLS to IG ExHVOL differential compressed to 37.83bps from 38.72bps, but remains above the short-term average of 35.1bps.

The 4 or 5 computers that were trading with each other today all executed perfectly according to the "regress to VWAP" program. If you were a human (presumably, since only a few East Setauket machines do serious OCRing here), and you thought you had any edge trading this market, you were a fool. Play again though, and better luck tomorrow.

After the good folks in the Deutsche Bank securitization group anticipated a 47% drop in NY housing prices in March, they have released an updated report discussing the future pain in the top 10 MSA, and the biggest outlier by a big margin, once again, is the New York-White Plains-Wayne NY-NJ MSAD. With a 40% drop in prices still to come, if in the market to sell some real estate, you may want to do it as soon as possible before potential buyers realize how much cheaper they can get that 2 bedroom TriBeCa loft for.

Summary from the DB report:

(1) while home sales activity has picked up in some regions, much of it reflects clearing of distressed inventory and is accompanied by falling prices. Over the last several months, many MSAs reached their all time highs in affordability, helped by low mortgage rates. Unfortunately, affordability is no longer the driving issue in the housing market and we believe prices still have a ways to fall in many areas before home prices reach their trough. The bottom is closer but we are not there yet.

(2) For the US we are now projection a further 14% decline from 1Q09 this compares to the 16.5% current to trough decline we published our last outlook in March '09.

(3) Affordability no longer an issue in most of the Top 10 MSAs in the US but factors such as unemployment, distressed inventory and home price momentum are combining to still result in quite negative current to trough outlooks in some large MSAs.

(4) In NY prices still have to drop an additional 32% from 1Q09 levels just to restore affordability to its historic high (1998) but including model risk factors beyond just affordability we are projecting a 40.6% decline from 1Q09 (vs 47.4% in March ).

Quants are back pushing the market up on no volume in tried and true fashion. Credit panicking, as 7 shares of something or another higher means inflation is here to stay. In the meantime, mortgages are on a one way street higher, while 2s10s are enjoying the cattle gun. At the same time, Treasury vol is starting to pick up again: just what the doctor ordered for a quant manipulated market as even PT volume disappears.

So which will it be Bernanke: 401(k) down only50% form their peak or people buying that 7th vacation home again.

A very vivid representation of securitization for the Obama generation. When you see 4 different tranches, at spreads between +50 and +425, and all rated Aaa/AAA/AAA, (not to mention all using 12x taxpayer money as leverage) it would be simply criminal if you do not invest all your client's money in any/all of these completely risk free classes.

Oh, and just in case you are desperate seeking a broker with whom to place your all in TALF order, look no further than Citi. After all...

Citi is uniquely qualified to arrange TALF loans due to its relationships with the Fed, the rating agencies, and TALF investors– Pricing and proceeds will be driven by underwriting, rating agency process and investors– Proper underwriting is essential to execution since Fed has discretion to refuse securities [We can't wait to see the Fed refusing some pristine AAA-rated POS]– Longstanding relationships at rating agencies and intimate knowledge of their models [just in case anyone thought there were no models at all]– Access to broad array of 100+ TALF investors, critical to driving tightest terms and resulting in best TALF execution track record to date [Alas Citi's rolodex excludes CMBS investors, resulting in exactly 0 interest in yesterday's CMBS TALF auction]

As the 10 Year has resumed its daily pounding (and it seemed like just yesterday that bond concerns had disappeared... oh wait it was - time to deflate equities guys), the scheduled bond releases for next week should make the bond vigilantes giddy at the prospect of further uncovering China's growing lack of interest in US printed pieces of paper.

Here is the line up for next week:

$40 billion 2 Years on Tuesday$37 billion 5 Years on Wednesday$27 billion 7 Years on Thursday

With Eliot Spitzer selling D.C. real estate these days, and Attorney Generals chasing hundreds of billions of dollar from illegal taxpayer funnels, it is no wonder there is nobody left to monitor potential abuse within the broker/dealer community. Among the items that has been trampled the most in the recent market free for all as everyone tries to make that last dollar before the market's terminal collapse, is none other than Regulation Fair Disclosure, or otherwise known as Reg FD. Taking from the SEC's own definition of Reg FD:

Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information the issuer must make public disclosure of that information. In this way, the new rule aims to promote the full and fair disclosure.

So assuming that Reg FD is still valid and actual, Zero Hedge has some questions of both the management team of Bank Of Hawaii Corp, and Morgan Stanley analyst Ken Zerbe, CFA.

In a report issued early today called: "Bank of Hawaii Corp. Hawaiian Weakness Could Lead to Higher Credit Losses" Morgan Stanley highlights the following:

What’s new: We hosted a dinner meeting with the management of Bank of Hawaii at our offices in NYC. We continue to view BOH as a well-run, conservative bank that has been largely isolated from many of the mainland credit problems, at least up until recently. Following our meeting with management, we expect the pace of credit deterioration to increase, including a potentially large increase in charge-offs during 2Q09.

The key takeaways from our meeting include: 1) the Hawaiian economy could see further weakness in the coming quarters, due to lower tourism, home price depreciation, rising unemployment, and less government spending; 2) higher credit losses in 2Q09 as BOH resolves certain loan exposures; and 3) overall fundamental weakness including ongoing NIM pressure and declining loan balances partially offset by solid fee income due to strong mortgage banking earnings.

What is particularly troublesome is this very selective disclosure from page 3 of the report, italics mine:

Expect Higher Credit Losses in 2Q09

Investors should expect both higher net charge-offs and provision expense in 2Q09. Management expects to resolve two larger credit issues in the quarter, which we suspect are its $17 million net mall exposure and a leasing exposure. While resolving these issues should be a positive, the likely higher resulting charge-offs could be viewed as a short term negative. We are also likely to see further increases in home equity losses, but lower charge-offs in its indirect auto portfolio. Management noted it would likely provision above charge-offs, implying a larger hit to operating income and EPS than we previously expected. Our revised provision estimate of $31 million (up from $23 million) is the main driver of our lower EPS estimates for the quarter.

In terms of overall credit quality and trends, we summarize management’s comments on each of its major loan categories below.

Areas of More Concern

Within its loan portfolio, management highlighted home equity as being the area where they could see the greatest deterioration in credit near term.The company has roughly $1 billion of home equity loans, of which a meaningful (but undisclosed) amount have LTVs in excess of 80%. With rising unemployment and further declines in home prices, home equity credit losses could start to rise noticeably. Land loans, within its residential mortgage segment, could also be at risk, although the company has just over $50 million of total exposure. Overall, residential mortgage loans are still performing well, with just 90 bps of early stage delinquencies as of 1Q09. Management also highlighted potential losses in its aircraft leasing portfolio, although it has already built considerable reserves against this portfolio (reserves of roughly $31 million against $76 million of loans). The risk of loss rises in aircraft leasing as the price of oil increases.

Can some professional working for any of the various US regulators (even input from Larry Summers in his role as Systemic Risk Regulatory Czar-in-waiting) please advise how Bank Of Hawaii is exempt from issuing an 8-K disclosing if nothing else, at least the highlighted pieces of information that it provided to MS' dinner participants? As the company has a $1 billion HELOC book (not to mention a $7 billion total loan book) on an $800 million tangible equity base, all of this information is in fact material, and, previously, non-public.

And while management may believe it has satisfied its fiduciary duty by disclosing a deteriorating loan book to 10 people eating filet mignon compliments of Morgan Stanley, Investor X who buys the stock today, without having access to this research report, and sees the stock tumble subsequently as the news from this reports goes viral, may very well disagree and in fact pursue legal action against management....and maybe the SEC for not enforcing its own regulations.

Good, succinct obit of the Green Shoots period compliments of Rosie's headline points from his morning piece.

Era of the Green Shoots is Over

It was fun while it lasted but if the latest set of data couldn't kybosh the 'green shoot' theory, then FedEx sure did when it posted earnings results that fell well short of target and the CEO announcing that the economic backdrop was "extremely difficult". On top of that, UAL stated that its 2Q traffic is expected to drop as much as 10.5% YoY on a 9.0% decline in available seats. Not only have the transports rolled over but so have the banks — the group that led the rally since early March — with a huge 3.3% loss yesterday (and now the group is down 20% for the year). Due to mounting concerns over commercial real estate exposure, S&P cut the ratings and/or outlooks on 22 banks yesterday (the regional banks of course — the ones that the Fed, Treasury and White House don't believe are too big to fail. As an aside, to see how the U.S. government's behaviour is dramatically altering private sector incentives, see Too Big to Fail, or Succeed in today's op-ed section of the WSJ.) We also see in today's FT (page 28) that Moody's is considering a wave of bank downgrades of its own premised on its concerns surrounding the quality of subordinated debt on bank balance sheets.

Screening for the CPI

The consumer price index rose by a much lower than expected 0.1% in May and this, like the PPI, took the YoY trend to a five-decade low, of -1.0%. We are going to see some larger monthly prints due to higher gasoline prices but because of the huge base effects of a year ago, when oil hit $150/bbl, we could still very likely see the YoY headline inflation rate sink to as low as -2.0% by the end of the summer. It is very clear that we are either in an extremely benign inflation environment or on the precipice of a deflationary environment. Either way, pricing power is confined to relatively few sectors.

Who has Good Pricing Trends at a time of -5.0% PPI?

We also ran sector screens on actual pricing power using the PPI, which is deflating at a 5.0% YoY pace, the most pronounced deflation rate in 50 years. The key is to identify the sectors whose pricing is not deflating, let along making new 50-year lows. So what is hanging in well? Soft drinks, alcoholic beverages, chicken producers, confectionary products, pet food/pet products and toys/games all look good.

As program trading computers pretend to care about such fundamental things as continuing jobless claims, a peculiar trend emerges. Over the past two months, it has become obvious that while continuing claims have doubled (up 124% to be precise from March 2007) - a major metric that many market participants (at least ones not based on a SPARC architecture) have been following - another, potentially more troubling observation is that Monthly Unemployment Payments have doubled the rate of increase in jobless claims (234% from March 2007 based on the Treasury Daily Statement). (For Leibniz fans, is this a third derivative issue?)

In summary, over the past two years, while unemployment claims have climbed from 2,688 million in March 2007 to 6,157 in May 2009, monthly unemployment payments have skyrocketed from $3,238 million to $10,807 over the same time period. Furthermore, run rating June 15 intramonth results, indicates that this will be the all time most cash outflowing month for unemployment benefits, at $12,354 million.

What all this means is that the Average Monthly Unemployment "Paycheck" has exploded from on average $1,000 to $1,800 in recent months (and over $2,000 runrated for June). Has the government been "pushing" benefits to the unemployed since December of 2008, when the increase commenced? The trend can be visualized easily in the chart below.

This would make sense practically: as there is way too much money that needs to be pushed to the consumer (either employed or unemployed), and since neither is borrowing from banks, maybe the Fed/Treasury have decided to facilitate the collection of outsized unemployment benefits in order to push the propagation of dollars in the economy. Of course, absent significant legislative change this would likely not be a legal approach to enhance M2 or MZM.

Wednesday, June 17, 2009

Even as Fed gets exactly zero CMBS TALF bids (Bloomberg), BofA is marketing Commercial Mortgage Debt (Bloomberg). When does this insane resecuritization attempt become criminal? How many more banks need to blow up?

Austrian Filter has taken the time to put together all the relevant quotes over the past 2 years that demonstrate how profoundly Bernanke and Paulson have been misrepresenting (or simply misunderstanding) just how extensive the crisis we are in, is. One can only imagine why anyone would ever believe anything Ben Bernanke (or any other vapid disseminator of groundless optimism) has to say anymore, after two years of outright hyperbole and unfounded green shootery.

February 28, 2007 - Dow Jones @ 12,268

March 13th, 2007 – Henry Paulson: “the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."

March 28th, 2007 – Ben Bernanke: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,"

March 30, 2007 - Dow Jones @ 12,354

April 20th, 2007 – Paulson: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained." , "All the signs I look at" show "the housing market is at or near the bottom,"

April 30, 2007 - Dow Jones @ 13,063

May 17th, 2007 – Bernanke: “While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S.”

July 12th, 2007 – Paulson: "This is far and away the strongest global economy I've seen in my business lifetime."

August 1st, 2007 – Paulson: "I see the underlying economy as being very healthy,"

October 15th, 2007 – Bernanke: "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions."

February 28th, 2008 – Paulson: "I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street."

February 29th, 2008 – Bernanke: "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system."

May 16th, 2008 – Paulson: "In my judgment, we are closer to the end of the market turmoil than the beginning," he said.

May 30, 2008 - Dow Jones @ 12,638

June 9th, 2008 – Bernanke: Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned,

July 16th, 2008 – Bernanke: (Freddie and Fannie) “…will make it through the storm”, "… in no danger of failing.","…adequately capitalized"

July 20th, 2008 – Paulson: "it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."

July 31, 2008 - Dow Jones @ 11,378

August 10th, 2008 – Paulson: ``We have no plans to insert money into either of those two institutions.” (Fannie Mae and Freddie Mac)

September 8th, 2008 - Fannie and Freddie nationalized. The taxpayer is on the hook for an estimated 1 - 1.5 trillion dollars. Over 5 trillion is added to the nation’s balance sheet.

September 16th, 2008 - $85 Billion AIG Bailout “Loan”

September 19th, 2008 - $700 Billion Bailout Plan Announced

September 19th, 2008 – Paulson: "We're talking hundreds of billions of dollars - this needs to be big enough to make a real difference and get at the heart of the problem," he said. "This is the way we stabilize the system."

September 21st, 2008 – Paulson: "The credit markets are still very fragile right now and frozen", "We need to deal with this and deal with it quickly.", "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."

September 23rd, 2008 – Paulson: "We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses, both small and large, and the very health of our economy,"

September 23rd, 2008 – Bernanke: "My interest is solely for the strength and recovery of the U.S. economy,"

October 31, 2008 - Dow Jones @ 9,337

March 31, 2009 - Dow Jones @ 7,609

Austrian Filter conlcudes correctly: "If Bernanke and Paulson were doctors, and our economy was the patient, they would be in jail for malpractice."
Sphere: Related Content

Even with the market oscillating lower, then higher, and finally closing unchanged, the trend in bonds has started getting ugly again. The bond vigilantes will need progressively more to be placated: a several % drop in the S&P just ain't gonna cut it no more.

2s10s closed at the day's (and 4 day) wides with a trend to accelerating widening.

Spreads were broadly wider in the US as all the indices deteriorated (with HY once again underperforming IG but the latter ending well off its wides of the day). Indices generally outperformed intrinsics (as single-names played catch up with last night's weak close) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew (in the face of a lower VIX - maybe OPEX week related).

The names having the largest impact on IG are International Lease Finance Corp. (-4.39bps) pushing IG 0.03bps tighter, and CIT Group Inc (+105.29bps) adding 0.58bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 0.13bps tighter, and CIT Group Inc contributing 2.57bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Allstate Corp (-2bps) pushing the index 0.02bps tighter, and Southwest Airlines Co. (+18.75bps) adding 0.19bps to ExHVOL.

The price of investment grade credit fell 0.13% to around 98.28% of par, while the price of high yield credits fell 1.005% to around 82.88% of par. ABX market prices are lower by 0.13% of par or in absolute terms, 0.59%. Broadly speaking, CMBX market prices are lower by 0.01% of par or in absolute terms, 0%. Volatility (VIX) is down -1.19pts to 31.49%, with 10Y TSY selling off (yield rising) 1.2bps to 3.67% and the 2s10s curve steepened by 4.4bps, as the cost of protection on US Treasuries fell 1bps to 45.5bps (outperforming the other SOV majors on AAA affirmation). 2Y swap spreads widened 1.9bps to 43.69bps, as the TED Spread tightened by 0.7bps to 0.44% and Libor-OIS improved 1.1bps to 38.4bps.

The Dollar weakened with DXY falling 0.6% to 80.225, Oil rising $0.41 to $70.88 (underperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.04% today (a 0.02% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $5.05 to $939.85 as the S&P is down (910.3 -0.19%) underperforming IG credits (140.75bps -0.13%) while IG, which opened wider at 138.5bps, outperforms HY credits. IG11 and XOver11 are +3.25bps and +16.5bps respectively while ITRX11 is +5.37bps to 122.25bps.

The majority of credit curves steepened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations).

Dispersion rose 8.5bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

61% of IG credits are shifting by more than 3bps and 68% of the CDX universe are also shifting significantly (more than the 5 day average of 55%). The number of names wider than the index increased by 2 to 46 as the day's range fell to 10.5bps (one-week average 8.92bps), between low bid at 136 and high offer at 146.5 and higher beta credits (4.58%) underperformed lower beta credits (4.11%).

Cross Market, we are seeing the HY-XOver spread decompressing to 267.62bps from 248.64bps, and remains above the short-term average of 252.07bps, with the HY/XOver ratio rising to 1.36x, below its 5-day mean of 1.36x. The IG-Main spread compressed to 18.5bps from 20.62bps, but remains above the short-term average of 18.05bps, with the IG/Main ratio falling to 1.15x, below its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 5.1bps to 119.5bps, with 5 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 4.7bps to 168.51bps, with Finance names (worst) wider by 34.98bps to 707.43bps, Brokers (best) wider by 1.88bps to 194.7bps, and Banks wider by 6.46bps to 221.33bps. Monolines are trading wider on average by 147.46bps (5.04%) to 2564.44bps.

In IG, FINLs outperformed non-FINLs (3.52% wider to 4.46% wider respectively), with the former (IG FINLs) wider by 10.9bps to 320.7bps, with 4 of the 21 names tighter. The IG CDS market (as per CDX) is 35.2bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (105.52bps), with the bond ETFs outperforming the IG CDS market by around 4bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 5.42bps to 122.81bps (with ITRX FINLs -trending wider- weaker by 5.14 to 120bps) and is currently trading at the wides of the week's range at 100%, between 122.81 to 105.5bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.03%, between 82.22 to 68.54bps. ExHVOL outperformed LoVOL as the differential compressed to 3.5bps from 7.08bps, and remains below the short-term average of 4.18bps. The Main exFINLS to IG ExHVOL differential decompressed to 37.09bps from 32.78bps, and remains above the short-term average of 33.69bps.